CPA Dave Young of the New York State Society of CPA’s discussed required minimum distributions, who must take them and the penalty for not doing so Monday during News 8 at Sunrise.
“So that’s the amount you need to take out from your qualified account, so an IRA,” said Young of the required minimum distribution, or RMD. Once you turn 70-1/2, you must take a minimum distribution by December 31 each year.
There are some exceptions according to Young. IIn the year you turn 70-1/2, you can take the RMD up to April 1 the following year. Also, if you’re still working, money in your 401(k) is excluded. Roth IRA’s are also excluded, unless you are receiving money from that account as a beneficiary.
The amount of the required minimum distribution is determined by a chart. “You just have to look into the IRS chart,” Young said. “Roughly in the first year, when you take it out it’s going to be just over 3 percent.” That figure represents all of your combined retirement accounts, excluding those which have exceptions, as of December 31 of the prior year. So for 2018, it would be the combined balance as of December 31, 2017.
Young said don’t wait until December 31 to make the required distribution. “One thing we’ve seen is you must make sure you back off the time for them to actually take that transaction into account. So if you call up on December 31, it’s not likely going to come up by December 31. You need to back off a few days because, whoever holds your account needs to have a few days to get that money out of there. So make sure you don’t wait till the last minute.”
Young added, “There are two levels of taxation, federal and state. You have a $20,000 exclusion at the New York State level. At the Federal level, it’s going to be included in your taxable income, so whatever your tax rate is. If you’re talking 12 percent on a tax rate, then it’s going to be taxed 12 percent.”
Failure to take your required minimum distribution will result in a penalty. “This is one of the highest penalties around for the IRS – 50 percent of what you should have taken,” noted Young. “So if you’re RMD was $10,000 and you didn’t take it we’re talking about a 50% of 10,000 a $5000 penalty.”
You can file a form with the IRS if you miss the distribution deadline, but it must be for a reasonable cause, such as an illness.
He concluded, “Just know if you’re 70-1/2, or your parent is or your loved one is, you might want to remind them or remind yourself, hey this is the year. Don’t leave it in the hands of the IRS, just be proactive and take your RMD now.”
For more “Smart Money” information, visit the New York State Society of CPA’s website — nysscpa.org/getmoneysmart.